Majority of fund managers believe shares are undervalued

Almost two thirds of Britain's most successful fund managers believe the UK stock market is undervalued after the recent sharp falls in share prices, according to a new survey.

The poll by Citywire Week, an internet magazine for financial advisers, comes after a further dismal week on the stock market which saw the FTSE100 index lose 4.5 per cent and dive back below the 3,500 barrier to end at 3,491.6 on Friday.

However, the growing view that shares are now cheap underlines the hopes of many in the City that the markets will bounce back after the uncertainty created by the looming war with Iraq has cleared.

According to the poll, 63 per cent of fund managers argued that the stock market is undervalued or significantly undervalued. Just last month less than half believed the market was undervalued.

Meanwhile, 71 per cent of managers now expect the stock market to deliver positive returns over the next 12 months. Just 15 per cent believe returns will be negative.

The Citywire survey, which polled 27 fund managers who are top-ranked or AAA-rated based on the performance of their funds over the past three years, was carried out after the Bank of England's decision to cut interest rates to 3.75 per cent last month.

The poll reveals that while fund managers are becoming more confident about a rise in markets, they remain deeply concerned about the prospects for the UK economy.

A massive 89 per cent believe that economic growth will change little or fall in the next 12 months. Last month one-in-four fund managers had been predicting an upturn in the economy.

Fund managers are also pessimistic about corporate profits. Despite hopes that companies can boost earnings through cost-cutting, three-quarters of fund managers argue that companies' earnings will change little or fall over the year.

A month ago two thirds believed there would be no recovery in corporate profits. The weak outlook for the economy has also led more fund managers, 37 per cent, to predict a further cut in rates, up from 29 per cent in February.

The survey also reveals that fund managers are looking for bargains in out of favour sectors. Some 30 per cent now believe that the financials sector looks attractive, up from 19 per cent a month ago.

The share prices of life insurers have been hit particularly hard in recent weeks over fears about their financial strength and dividend cuts by major companies in the sector such as Aviva. Last week, shares in Friends Provident were dirven to an all time low at one stage.

Fund managers also favour defensive areas such as healthcare and utilities while tobacco and retail shares have gained support. However, they have become even more bearish media companies.